Back in May, I worked for a now-defunct Taxpayers’ Union organisation for two weeks. I wrote several articles for them which were never published. I feel they are still relevant today, and hope you find them interesting.
Rio Tinto, the Australian mining giant, has closed its only remaining South African operation in Richards Bay, following chronic security problems. The entity in question, Richards Bamy Minerals, has already had to delay its R6.6 billion expansion operation in 2019 for the very same reasons – intimidation of staff, blockades of transport routes and destruction of equipment and infrastructure.
The operation, which uses strip-mining to extract titanium, an essential ingredient in industrial paints and insulation materials as well as sunscreen and toothpaste, will have to lay off thousands of workers to prioritise the safety of its core employees, after manager Nico Swart was shot dead on his way to work. This comes as thousands more jobs have been lost following the lockdown policies’ impact on the broader economy, and South Africa’s economic competitiveness was assessed at a near-bottom ranking internationally.
From PwC’s “SA Mine 2020”:
But Rio Tinto isn’t the only mining company whose bottom line has been affected. The whole mining industry is in chronic, and some might argue irreversible, decline. Even official government reports, like the one sponsored by Gwede Mantashe in 2008 have recognised this fact. But their solution was to endorse the ANC-controlled NUM as the sole appropriate representative of workers in the sector, facilitating the rigid and draining network of patronage which the tripartite alliance manages across the platinum belt.
As Marikana demonstrated however, even the power of the tripartite alliance and their suspicious relationship with NUM shop stewards cannot keep industrial action from breaking out. The delegitimation of the ANC’s ties to the older labour unions has resulted in an explosion of wildcat strikes and racketeering by entrepreneurial political outsiders, who often employ violence, like the infamous “construction mafia”, which emerged only a few years ago, and which has become a mainstay of that sector ever since [insert link to my previous article on construction mafia].
The systemic causes (see this report by Business for South Africa) of the collapse of the mining industry include many of the obvious factors – safety and security, decaying infrastructure causing supply bottlenecks, interrupted power supply, BEE, union strikes, heavy corporate tax margins, and regulatory uncertainty– but the key reason, which follows from many of these background causes, is the way it drives up the expense of drilling new mines. Because of the risk and the expense, new mines are not being sunk, and as a consequence, existing operations are scraping the bottom of exhausted old mineshafts.
Rand inflation and skyrocketing international mineral prices have saved South African mines from collapse, and even seen a growth in revenues for the past five years, but structural threats remain, which will outlive such market fluctuations.For the past 20 years, SA mines have underperformed globally while other mining-dominant economies have seen a massive boom with the growth of Chinese mineral demands, and our investment environment is largely to blame – operatingexpenses increased by 33% in the last year alone (p39), largely driven by the cost of employment.
Business experts have expressed the desire for the government to write all regulations into law to give them a greater degree of certainty about the regulatory pitfalls they face, but so far these hopes have not been forthcoming. The state continues to issue new regulations in an etra-legislative capacity. The uncertainty created by this sort of environment deters investment, which is essential to begin industrial modernisation and new mineral explorations.
South Africa has one of the largest coal deposits in the world, but because of the negative investment environment, our coal supply is set to collapse by 2025. Eskom is already paying above export price for low-grade coal, while continuing to export energy to neighbouring SADC countries, and the demand for electricity is rising faster than supply can keep up with. The same structural elements mentioned before apply to coal mines, but with Eskom, the inefficiencies created by corruption compound the issue.
Special concessions to a Chinese firm in Limpopo have allowed the extraction of coal for electrical supply for a new Chinese colony, but obstacles to native production and foreign investment from the west remain steep. The Chinese project comes in exchange for billions of rands in loan to the South African government, in exchange for special concessions which allow them to operate at acceptable margins which are not extended to others: a 15% corporate tax rate, compared to SA’s ordinary 28%. The tax breaks form part of a “special economic zone” to which Chinese manufacturers and resource extraction companies have exclusive access.
Much like the Chinese model, mining companies are increasingly moving to take over whole supply networks to mitigate risks in the highly uncertain operating environment Africa provides, as PwC outlines (p21-22). Companies are also consolidating, with mergers and acquisitions increasing by 41% in the last year alone (p25) – much of the financial turnover celebrated by companies in recent times can be attributed to this development, which sees small companies swallowed up by larger ones, and asset sales contribute to temporarily healthier ledgers.
But much of the record profits accrued in the last year may well be temporary:
“The market capitalisation of PGM and gold companies increased by a massive 65% and 122% respectively. This increase was mainly driven by strong financial performance as a result of higher PGM basket prices and investors fleeing to invest in gold – traditionally a ‘safe haven’ investment – amid nervousness about the COVID-19 pandemic and global trade tensions”
While the recent successes may bode well for the capital class, the structural features of the economy and government will mean long term decline across several sectors. The recent pandemic and economic crisis may have been a boon for the mining industry, but waiting for a global economic crisis to save your skin is no model for business.